ANTITRUST FUNDS

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Jeff Elkins calls it his “smoking gun.” Legally, he's
not allowed to talk about it in detail. All he can say is that his
lawyers found it buried in a cramped 5-by-10-foot room in a Pacific
Bell facility with no windows and no ventilation.

It was the spring of 2000, near the deadline for gathering evidence
in the antitrust suit Elkins had filed against Pacific Bell on behalf
of his company, DSL provider CalTech International. CalTech's lawyers
dug through 32 dusty boxes full of Pac Bell company records that day.
What they eventually found, stuck between two sheets in those towers of
paper, was a document so incriminating it ultimately won the case for
CalTech.

According to Elkins, CalTech's president and CEO, the papers proved
that the sloth and error with which Pac Bell served its competitors was
not only intentional, but directed by upper management. Pac Bell
eventually settled the case for an undisclosed sum, presumably to avoid
setting any legal precedent that other CLECs could use. But ironically,
the settlement itself became a kind of precedent for disgruntled CLECs
with their own interconnection complaints — each hoping to
discover their own smoking guns and cash in on the combative
relationships between start-ups and incumbents.

Since the CalTech case began, eight companies have filed 10
antitrust suits against RBOCs, claiming that Bell misconduct —
billing errors, provisioning delays and unfair marketing tactics
— constituted an unlawful effort to harm competition. Of those
10, four were dismissed at the district level and are pending in
various stages of appeal. Two are still languishing in district court
pending decisions on Bell motions to dismiss. Four won settlements; the
most recent, by Georgia-based CLEC NOW Communications, occurred in
May.

No matter how the remaining cases fare, though, there are likely to
be more. Antitrust suits carry with them the possibility of trebled (or
tripled) damages, making them a tempting gambit for struggling CLECs.
And because RBOCs have been known to pay off plaintiffs before a final
judgment to avoid setting legal precedent, a growing number of CLEC
lawyers are brushing up on antitrust law and considering action.

In January, Pulver.com — a voice-over-IP start-up that also
makes money by hosting conferences — began holding monthly
teleconferences to rally and coach those waging antitrust suits as well
as those considering one. In four months, the number of participants
grew from 20 to 50.

“We don't have a pending antitrust case — yet,”
Tom Cosky, vice president of regulatory affairs at Z-Tel
Communications, said in a Pulver teleconference in late April.
Likewise, Chris Savage, attorney for Cole, Raywid & Braverman
(which represents a variety of CLECs such as Global NAPs and Centennial
Communications) added that none of his clients has an active antitrust
case now — “but stay tuned.”

CLECs have no shortage of grievances about RBOC relations, but few
have cash to burn for a protracted legal battle. Most of them are
staying on the sidelines for now, learning vicariously from the current
pack of plaintiffs.

However, in one of its three cases, troubled DSL dealer Covad
Communications was able to turn its antitrust suit into a ticket out of
bankruptcy, further tempting would-be litigants. “[Covad is]
thrilled about their return on investment,” said Dan Berninger,
managing director of Pulver.com.

SBC settled its antitrust suit with Covad in September 2000 by
offering, among other things, a $150 million equity investment and a
sales contract worth $600 million over six years. Looking for a quicker
way out of bankruptcy, Covad renegotiated the deal a year later,
trading the previous offer for a package that included an upfront
payment of $75 million and a $50 million loan. In addition, SBC forgave
$15 million Covad owed the RBOC for co-marketing efforts.

Over the long term, the latter package isn't worth as much as the
original settlement, but Covad's new deal allowed it to emerge from
bankruptcy a month later. And, Berninger said, it showed other CLECs a
way to escape long-term debt.

“I fully expect all of them to come out with the ‘Covad
model,’” said Berninger. “Aggressive antitrust
litigation is the way to get paid, to get out of bankruptcy.”

Still, antitrust claims aren't easy money by any stretch of the
imagination. They're tough to argue and they take forever, and the
Bells are no pushovers in court. Cavalier Telephone, for example, is
fighting its case against Verizon using three in-house lawyers; Verizon
met them with 11 lawyers, including representatives from four outside
firms. Ntegrity's lawyer, Diane Parker, has been waging her client's
own suit against Verizon since March 2000 on a contingency basis, only
getting paid if she wins. Ntegrity went out of business almost a year
ago.

“So far, the antitrust cases have not been a good way [for
CLECs] to get money,” said John Thorne, who represents Verizon in
both antitrust cases. “Look at the track record. The district
courts have mostly dismissed these cases.” Four of the six active
cases were dismissed at the district level on the grounds of an
appellate-level decision made in July 2000 in a consumer antitrust suit
known as Goldwasser v. Ameritech. The other two will likely go the same
way.

Richard Goldwasser was a Chicago Ameritech customer who filed an
antitrust claim against the company in 1997 on the basis that its
anti-competitive behavior — dragging its feet on
loop-provisioning, mishandling billing, etc. — excluded CLECs
from competing, denying Goldwasser the benefits of a competitive
market. District and appellate courts agreed that Goldwasser had no
antitrust case, determining that the rules Ameritech was breaking were
all duties imposed by the Telecom Act of 1996, and that consequently,
Ameritech was only guilty of violating the Telecom Act, not the Sherman
Act (the principal antitrust law).

Essentially, Ameritech wasn't harming its competition; it just
wasn't helping as much as it should, and antitrust law doesn't
generally require companies to aid their competitors. Therefore, the
court said, this matter was best addressed by regulators, not
robes.

This precedent makes it virtually impossible to litigate RBOC-CLEC
conflicts as antitrust cases. As one participant of Pulver's April
teleconference put it, “If Goldwasser is the law, we are majorly
screwed.”

Not surprisingly, plaintiffs now spend much of their time trying to
find a way around Goldwasser. It isn't easy. For one, they need to
couch their grievances outside the context of the Telecom Act, and
there are very few examples of companies being required to help their
competitors.

Most plaintiffs have cited a controversial 1985 case called Aspen
Skiing Co. v. Aspen Highlands Skiing Corp., in which four neighboring
ski resorts sold passes to customers that gave them access to all four
competing hills. When the three largest hills decided to exclude the
smallest from the joint-pass promotion, the Supreme Court said their
“refusal to deal” with their competitor was
anti-competitive because their only purpose was to sink that
competitor.

Another rare example of such obligation is the seminal MCI v.
AT&T, in which the court ruled in 1983 that AT&T was
anti-competitive for not letting MCI use the “essential
facilities” it needed to compete — namely, AT&T's local
network. That case, of course, ultimately resulted in the 1984 breakup
of AT&T and the creation of today's RBOCs.

Plaintiffs in today's antitrust cases have cited both the Aspen Ski
case and the MCI case in their complaints, arguing that RBOCs not only
own the “essential facilities” they need to compete, but
that RBOCs' misdeeds in serving CLECs amount to a “refusal to
deal.” Plaintiffs tried convincing judges that the FCC and the
Department of Justice agree with them by submitting amicus curiae
briefs (basically written testimony) from both agencies that underscore
the “antitrust savings clause” in the Telecom Act, which
says the Act does not “modify, impair or supersede”
existing antitrust law. The clause shouldn't be interpreted as granting
RBOCs immunity from antitrust law, say the DOJ and FCC. But RBOC
lawyers claim they're not seeking antitrust immunity, which brings the
polemic back to square one.

CLECs have also claimed “legislative history” supports
them in an amendment to the Internet Freedom and Broadband Deployment
Act (a.k.a. Tauzin-Dingell) that says Goldwasser has been misapplied.
But because Tauzin-Dingell is not law — it was passed by the
House but is expected to die in the Senate — it's a stretch, if
not a pun, to call it “legislative history.”

Still, lawyers on both sides agree that the odds of a case beating
the Goldwasser argument rest largely on the leanings of each particular
judge. Some plaintiffs have already gotten past Goldwasser, even if
only temporarily. Ntegrity beat a Verizon motion to dismiss based on
Goldwasser in November 2000, but when the judge who denied the motion
fell ill, the case was handed over to another judge who reheard the
motion. That judge is still deciding whether to dismiss the case. So
far, Goldwasser is the only case to reach a decision at the appellate
level. It will surprise no one if the two district courts still
considering this issue uphold the higher court's ruling; district
courts usually do. But appeals courts routinely contradict their peers,
making the four appeals courts that currently have Bell antitrust cases
pending more likely to make up their own minds about the Goldwasser
argument. Even RBOC counsels admit there's a chance at least one of the
circuit courts will reverse Goldwasser. From there the case would
likely be appealed to the Supreme Court — all of which would take
a really, really long time.

“The Supreme Court tends to take about one antitrust case per
year,” said Verizon's Thorne.

But to most plaintiffs, a payoff would be preferable to a Supreme
Court fight, and their best chance at a settlement depends on the
evidence-gathering “discovery” phase of a trial at any
judicial level. In the discovery phase, they can vet Bell employees,
root through countless e-mails and search dark, dusty rooms for the
ultimate prize: proof of predatory intent. If these plaintiffs can
show, as CalTech did, that the harm Bells caused them was intentional,
they stand a good chance of getting paid handsomely for it.

“[Pac Bell] knew they were going to lose a lot of money to
competition — billions. And the only way to survive that was to
slow it down,” said CalTech's Elkins. The smoking gun document
“came from the most senior levels of the corporation. It took
midway through the trial before anyone conceded that this group even
existed.”

Some CLECs are so eager to get inside the dark rooms of discovery
that they've suggested using a back door to get there. “We need
to turn these guys into the tobacco companies,” said another
participant in Pulver's April teleconference. “Tobacco wasn't a
drug until we knew the facts, and then you saw how quickly the law
changed. That's our best tactic for getting around Goldwasser. Utilize
state proceedings and other types of litigation that aren't necessarily
antitrust cases to bring facts, get discovery and amend your
complaint…add an antitrust claim.”

If anyone has lasting success in beating a path past Goldwasser,
Berninger expects a stampede of new plaintiffs to follow it with their
own antitrust suits. “The people that will drive this process
will be, essentially, ambulance chasers,” he said. “The
same people that drive malpractice and asbestos suits. Attorneys that
are very wealthy and see a gold mine here.”

In addition to CLECs, Berninger imagines consumers and limited
partners of venture capital funds that invested in CLECs will stake
their own claims. “Anyone who receives a phone bill is an injured
party because they're paying prices that are higher than they would be
if this was a competitive market.”

But even some of Berninger's own comrades in arms admit he's being
overly quixotic. “I don't think there's going to be a ton of CLEC
antitrust suits out even if Goldwasser dies a bloody and final
death,” said Cavalier General Counsel Steve Perkins.

As for investors and consumers, it's much harder for them to prove
they have a right to remuneration, or what lawyers call
“standing,” in these matters. A New York district court in
April dismissed a class action antitrust suit filed on behalf of
consumers by the law offices of Curtis V. Trinko. (The appeal is now
pending in the 2nd Circuit.) Meanwhile, RBOCs' perennial legal
adversaries MCI and AT&T have kept their distance in this fight,
though AT&T counsel Larry Lafaro told the April Pulver conference
the company was “interested in eliminating Goldwasser to the
extent we can.”

But while plaintiffs huddle together month after month to rethink
their strategies, the defendants in these antitrust cases don't seem
particularly nervous about the future. In response to Berninger's
vision of a flood of new litigants, a polite Thorne said only,
“Sounds like an optimist.”

CASES CLOSED

CalTech vs. Pacific Bell

Settled in December 2000 for an undisclosed amount

Covad vs. SBC

Settled in September 2000: $150 million in equity investment + $600
million in sales over 6 years (later renegotiated)

Intermedia vs. BellSouth

Settled in 2001 for an undisclosed amount

NOW Communications vs. BellSouth

Settled in May for an undisclosed amount

Electric Lightwave vs. U S West

Settled in June 1999 for an undisclosed amount

CASES STILL PENDING

Cavalier Telephone vs.
Verizon

Dismissed by Virginia district court in March; appeal pending in 4th
Circuit